AN ACT CONCERNING DEBT REDUCTION SERVICES.

This bill (1) defines, regulates, and requires certain actions of debt reduction services, similar to current law's requirements for credit clinics, and (2) requires debt reduction services to be tax-exempt nonprofit entities, as defined under federal law, to operate in the state.

It creates a three-day period during which a consumer may break a debt reduction contract without consequence, and extends this to credit clinic service contracts.

The bill applies to contracts of a credit clinic service or debt reduction service, which includes certain foreclosure rescue services, when the consumer who signs the contract is a Connecticut resident or maintains a home in the state and negotiates or agrees to the contract terms in person, by mail or telephone, or via the Internet while physically present in the state.

Under the bill, the banking commissioner may review any fees or charges a credit clinic or person offering debt reduction services assesses. He has the same investigative powers for these purposes as with other banking issues.

Violations under the bill, as with current law concerning credit clinics, are an unfair trade practice.

The bill also provides funding for oversight of these services. Specifically, it requires that some funds the Banking Department receives or collects from assessments or fees that the law requires credit unions and banks pay to fund the department be used for oversight of people providing debt reduction, foreclosure rescue, or credit clinics services. It requires the Office of Policy and Management secretary to allocate enough of the Banking Department funds to the Department of Consumer Protection (DCP) and the state comptroller for this oversight.

The bill defines “debt reduction services” as the selling, providing, or performing of, or representation that a person can sell, provide, or perform, a service for the express or implied purpose of reducing or eliminating a consumer's debt or reducing the interest rate charges on that debt. The definition includes foreclosure rescue services, but it excludes services preformed by any:

1. federally or state-licensed or chartered bank or credit union;

2. existing creditor of the consumer when the service relates solely to the debt the consumer owes that creditor;

3. debt adjuster licensed under Connecticut law, when performing debt adjustment services under such a license; or

4. attorney representing a client.

Under the bill, “foreclosure rescue services” means those related to or promising assistance with:

1. avoiding or delaying actual or anticipated foreclosure proceedings of residential property or

2. fixing a default or failure to pay a residential mortgage loan obligation on time, including the offer, arrangement, or placement of a residential mortgage loan or other loan when those goods or services are advertised, offered, or promoted in as foreclosure-related services.

The bill requires that debt reduction services be 501(c)(3) tax-exempt organizations. By law, nonprofit organizations may not operate credit clinics. By law, a “credit clinic” is a business that offers services to correct, change, or delete adverse credit entries other than credit rating agencies, attorneys, and certain tax-exempt organizations.

For credit clinics' contracts, the law requires certain information in bold face type (at least a 10 point font size) that states there is no fee for a credit report for a person who has been turned down for credit, employment, or insurance due to information in a credit report within the preceding 30 days. The bill adds to the required contract language that there is no fee for people seeking a credit report for the first time in 12 months.

Other Requirements and Prohibitions for Credit Clinics and Debt Reduction Service Companies

The bill prohibits debt reduction services from charging or being paid in advance for their services and requires them to disclose certain information about their services and charges, similar to the law for credit clinics.

By law, each contract for a credit clinic must contain a complete, detailed list of services to be performed by the clinic and the results the clinic will achieve. A copy of the consumer's current credit report must be attached to the contract with the adverse entries to be modified clearly marked. The bill extends these requirements to debt services, including foreclosure rescue services.

1. a statement certifying that the person offering debt reduction services has reviewed the consumer's debt and

2. an individualized evaluation of the likelihood that the proposed debt reduction services would reduce the consumer's debt or debt service or, if appropriate, prevent the consumer's residential home from being foreclosed.

The bill requires each contract to allow the consumer to cancel or rescind the contract during the three-day period after the date on which the consumer signed the contract. The contract must contain a clear and conspicuous caption stating: “Buyer's three-day right to cancel. ” It must also state:

“If you wish to cancel this contract, you may cancel by mailing a written notice by certified or registered mail to the address specified below. The notice shall state that you do not wish to be bound by this contract and must be delivered or mailed before midnight of the third business day after you sign this contract. ”

By law, a credit clinic contract that does not contain the provisions current law requires is void and the credit clinic must return any payments the consumer made under the voided contract to the consumer. The bill makes void any debt reduction service contracts, including foreclosure rescue services, that do not contain the bill's requirements (e. g. , three-day cancellation clause), and stipulates that such services must also return a consumer's payments in such a case.

The commissioner may order debt reduction services to reduce or repay portions of the fees or charges that he deems excessive, taking into consideration the fees that other credit clinics or similar debt reduction services charge for their services and the financial benefit of the services to the consumer.

The Connecticut Unfair Trade Practice Act allows the DCP commissioner to issue regulations defining what constitutes an unfair trade practice, investigate complaints, issue cease and desist orders, order restitution in cases involving less than $ 5,000, enter into consent agreements, ask the attorney general to seek injunctive relief, and accept voluntary statements of compliance. It also allows individuals to sue. Courts may issue restraining orders; award actual and punitive damages, costs, and reasonable attorneys fees; and impose civil penalties of up to $ 5,000 for willful violations and $ 25,000 for violation of a restraining order.

On April 22, the Senate referred the bill to the Appropriations Committee. On April 27, the committee favorably reported the substitute that adds funding from the Banking Department for DCP and comptroller oversight of the debt reduction, foreclosure rescue, and credit clinic services.

Yea

Nay

(03/10/2009)

Yea

Nay

(04/14/2009)

Yea

Nay

(04/27/2009)